Returns on informal and formal finance for Indian informal firms: a pseudo panel data analysis

Lokesh Posti (), Mamta Kholiya () and Akhilesh Kumar Posti ()
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Lokesh Posti: OP Jindal Global University
Akhilesh Kumar Posti: Rani Durgavati Vishwavidyalaya

Empirica, 2025, vol. 52, issue 3, No 7, 611 pages

Abstract: Abstract The study investigates the differential impact of various sources of finance on informal firm performance. In the informal sector, where access to finance is limited, we investigate how productivity varies with different sources of finance. Given the data limitations, a pseudo-panel data design was used by combining the three only available, independent cross-sectional surveys conducted by the National Sample Survey Office between 1999 and 2000 and 2015–16. Using formal and informal credit as two different sources of finance and total factor productivity (TFP) as the primary measure of firm performance, we find a positive relationship among them across all major industries; however, the impact of formal finance was higher than informal credit. Our results stand robust against alternative performance measures. Additionally, to address endogeneity concerns, dynamic panel data analysis was adopted. Obtained findings convey essential policy implications for intensification of financial inclusion and financial literacy.

Keywords: Informal sector; Finance; Credit; Total factor productivity; Pseudo panel; India (search for similar items in EconPapers)
JEL-codes: D24 L25 M21 O17 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10663-025-09650-6

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